Summers: We Should Regulate Financial Products Like We Regulate Car Seats For Babies

Today, the Center for American Progress and the Hamilton Project held a conference examining challenges in the labor market, but since the topic du jour right now in Washington is financial regulatory reform, the discussion almost inevitably wound its way to that subject. The day’s final panel featured New York City Mayor Mike Bloomberg and National Economic Council Director Larry Summers, both of whom weighed in on financial reform.

Bloomberg, of course, is mayor of a city that depends, in very large part, on tax revenue from Wall Street bonuses, so he’s hesitant to endorse much that will significantly crack down on financial sector profits. To that end, when asked about the proposed creation of a new consumer protection regulator, Bloomberg said that he’d prefer the focus be on financial literacy education, “not restrictions.” Summers, however, disagreed:

We don’t allow you to sell baby seats that are unsafe for babies. We don’t allow you to sell baby seats that look good, but that have 20 pages of print that say ‘by the way, it’s not safe’…I don’t see the problem with some regulation that actually goes to the content of the product.

This resembles the rhetoric employed by Harvard Law Professor Elizabeth Warren in making her case for the creation of an independent consumer protection regulator. As she pointed out way back in 2007, you aren’t allowed to sell a toaster with a 20 percent chance of exploding, but you can sell a mortgage with a 20 percent chance of putting a family into foreclosure:

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street…Similarly, it’s impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?

During the financial reform debate that is set to kick into high gear next week, Republicans are set to propose amendments gutting the consumer protection portion of Sen. Chris Dodd’s (D-CT) legislation. But to be effective, the new regulator has to be able to ban financial products that serve no purpose other than to boost bank profits at the expense of consumers.